Commentary

Should Goldman’s rogue trader go free?

Commentary: Former Goldman trader faces 20 years in jail while firm pays a fine

By

AlLewis

DENVER (MarketWatch) — Put a 20-something in front of a computer. Give him billions of dollars to make bets. Tell him that if he wins, he’ll get millions of dollars, and if he loses, he’ll be fired. Surround him with cocky, young colleagues full of ceaseless banter, hypercompetitive antics, salty jokes and the insatiable lust for overnight riches. Throw in the added volatility of a looming financial crisis.

What do you think is going to happen?

Former Goldman Sachs Group Inc.
GS, +1.63%
trader Matthew Marshall Taylor pleaded guilty to a single count of wire fraud Wednesday and faces up to 20 years in prison when he is sentenced July 26. He admitted that in December 2007, he hid an $8.3 billion futures position from his supervisors that resulted in a $118.4 million loss.

He said he was sorry. Goldman said it was disappointed. And the judge said, plainly enough, “He cooked Goldman’s books.”

EPA

Matthew Marshall Taylor is facing up to 20 years in prison.

Remarks from U.S. District Court Judge William Pauley III hinted at a steeper prison sentence than prosecutors may recommend in light of Taylor’s cooperative guilty plea.

Taylor, now 34 years old and living in Florida, told the court he was only trying to get his bonus and a promotion.

Goldman “discharged” him, according to Taylor’s so-called U5 form filed at the Financial Industry Regulatory Authority. Goldman also reported on this form “alleged conduct related to inappropriately large proprietary futures positions in a trading account.”

Three months later, Taylor got a job at Morgan Stanley
MS, +1.33%
, where he’d worked before joining Goldman. A Morgan Stanley spokesman declined comment on Taylor’s rehiring following the enormous trading debacle at Goldman. Taylor then remained at Morgan Stanley until August as regulatory and criminal cases mounted against him.

So how do you hide billions in trades and millions in losses, get fired for it, and then get a new job at another major firm while regulators and prosecutors pursue you for fraud?

“Wall Street management is overrated,” said Larry Doyle, who worked as a trader for 15 years at several major firms, including First Boston, Bear Stearns, Bank of America and J.P. Morgan Chase.

Goldman’s compliance and risk management systems should have caught Taylor’s rogue trades, and Morgan Stanley should have learned about them before rehiring Taylor, said Doyle, who blogs about financial folly at Sense on Cents and is writing a book called “In Bed with Wall Street.”

“Any trading manager worth his salt does proper background checks,” Doyle told me. “In the course of a dozen phone calls, you can typically get a pretty good read.”

Perhaps Morgan Stanley felt comfortable with Taylor since he’d worked there before. Perhaps the firm felt that Taylor’s misconduct was merely alleged by one of its brutal competitors. Or perhaps it didn’t care. In any case, the story has now fermented into a full stink.

In December, Goldman paid a $1.5 million fine to settle charges from the Commodity Futures Trading Commission that it failed to properly supervise Taylor’s trades. The firm neither admitted nor denied guilt, as is typical, but also agreed to improve its compliance systems. In a dissenting opinion, one CFTC commissioner said he thought the fine should have been “significantly higher in order to represent a sufficient punishment, as well as to denote a meaningful deterrent.”

Deterrents are difficult to come by in the financial world, which is why, in the annals of rogue trading, Taylor barely ranks as a footnote. His losses amount to a fraction of a billion. Kweku Adoboli lost $2.3 billion at UBS AG
UBS, +0.00%
in 2011, and Nick Leeson brought down the 233-year-old Barings Bank with a 830 million pound loss in 1995.

More recently, we learned of $6 billion in sketchy trading losses at J.P. Morgan Chase & Co.
JPM, +2.07%
by someone known primarily as “the London Whale.” Last month, a Senate subcommittee came out with a 300-page report concluding the nation’s biggest bank ignored risks, misled investors, battled regulators and danced around the rules as its iconic whale spouted losses.

In a Senate hearing, the former head of J.P. Morgan’s investment office, Ina Drew, tried to blame the losses on underlings. But she couldn’t get Republican Sen. John McCain to understand how underlings could trade away billions of dollars without anyone at the top taking notice.

“The traders seemed to have more responsibility and authority than the higher-up executives,” McCain said.

So what do we do with these pesky rogue traders?

John Coffee, a Columbia Law School professor, told me he thinks Taylor should receive a prison sentence of about two years. That’s what former Goldman director Rajat Gupta received after his conviction on insider-trading charges last year.

“If Gupta, the director, gets two years, I wouldn’t expect this junior employee to get more than two years,” he said.

Some prison time is unavoidable, Coffee said. “If you give probation to a person in his position, it may make other rogue traders think it’s not that big a risk. They’ll say, “I’m already in the hole, I’m already going to be fired, but if I can make it all back, and make a profit, then I’ll be a hero rather than a villain.’”

Doyle, on the other hand, told me it’s unfair to put a trader in prison while the supervising firm pays a meaningless fine without admitting nor denying guilt. “If they’re putting him in jail, I’ve got the names of 10 other people who should have been put in jail. Instead, they went on to very profitable careers at other shops.”

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